Question

Alpine West, Inc., operates a downhill ski area near Lake Tahoe, California. An all-day, adult ticket can be purchased for $80. Adult customers also can purchase a season pass that entitles the pass holder to ski any day during the season, which typically runs from December 1 through April 30. The season pass is nontransferable, and the $460 price is non refundable. Alpine expects its season pass holders to use their passes equally throughout the season. The company's fiscal year ends on December 31. On November 6, 2013, Jake Lawson purchased a season ticket.
Required:
a. When should Ski West recognize revenue from the sale of its season passes?
b. Prepare the appropriate journal entries that Ski West would record on November 6 and December 31.
c. What will be included in the Ski West 2016 income statement and balance sheet related to the sale of the season pass to Jake Lawson?

Answer 1

Answer:

Alpine West, Inc.

a. When Alpine West, Inc. should recognize revenue from the sale of its season passes evenly over five months from December to April when the passes are put to use.

b. General Journal for

November 6:

Debit Cash Account $460

Credit Deferred Revenue $460

To record the purchase of a season ticket or pass by Jake Lawson.

December 31:

Debit Deferred Revenue $92

Credit Service Revenue $92

To record the ski service consumed by Jake Lawson for December.

c. In Alpine West, Inc.'s income statement and balance for 2013, the following amounts will be included in relation to the sale of the season pass to Jake Lawson:

Income Statement: Service Revenue $92 and related costs.

Balance Sheet: Deferred Revenue (Liabilities side) $368 ($460 - 92).

Explanation:

Alpine West, Inc. will make the above entries in accordance with the accrual concept and matching principle of generally accepted accounting principles.  These require that revenue, income, and expenses related to a period must be accrued for that period whether actually received / paid or not.  It also means that the costs incurred for any revenue generated must be matched to the revenue and vice versa for that particular period.